Government Spending

Andrew Mickey comments today about the planned infrastructure spending spree that is slated to take place next year and why he does not think that the effect it has had on infrastructure stocks is sustainable.

Early estimates put total new government infrastructure spending between $60 and $70 billion over the next two years. Don’t get me wrong, that’s a lot of money (nothing like the other bailouts, but it’s still a lot) headed directly to construction companies. And, already, Wall Street has started anticipating a big government-funded payday for a lot of these construction companies.

I have absolutely no confidence this run in infrastructure stocks can last. In fact, I expect it to end abruptly in the coming weeks and months once reality sets in.

His reasoning,

First of all, states, which normally fund the majority of infrastructure projects, are in terrible financial shape

Secondly, the profit margins for these projects are going to be poor at best. It all comes down to supply and demand. And even a two-year, $60 billion boost in demand isn’t enough to tip the scales in the favor of builders. As a result, bidding wars will practically eliminate any profits to be had from these projects. It’s already started to happen.

Finally (and what should be most important to investors) is the majority of the construction industry is private. According to FMI, a construction industry consulting firm, only 9.6% of American construction firms are publicly traded. The rest are private companies which don’t trade on any stock exchanges.

Another point that could be added to this list is that major construction projects take years to get started, if not more.  The design phase for many major infrastructure projects can stretch into years even before the required, and often endlessly litigated, environmental reviews begin.  The only infrastructure projects that could be started probably within the president’s first term would be ones that are already set to go but have been shelved for solely for financial want.

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